Here's the meltdown Bill Ackman had when he found out what was going on at Valeant

Billionaire investor Bill Ackman, founder of Pershing Square Capital Management, had been working with Michael Pearson, the former CEO of Valeant Pharmaceuticals, for over a year when it was revealed that the company was funneling drugs through a shady secret pharmacy called Philidor.

And according to court documents filed by mutual fund T. Rowe Price, an investor in Valeant now suing the company, when Ackman started to understand what was going on, he sent a succession of increasingly desperate-sounding emails trying to get Valeant executives to come clean.

The fact that investors like Ackman and T. Rowe were allegedly lied to by Valeant's management is the very crux of this lawsuit. T. Rowe is accusing Valeant of lying about its growth, its price gouging practices, Philidor, its other "captive pharmacies," its use of patient assistance programs to preserve high prices, the depth of its legal risk, and its lack of compliance and controls.

And so it's important to understand how taken aback everyone really was.

"I don't think you are handling this correctly and the company is at risk of getting into a death spiral as a result," Ackman wrote on October 27, two days before Valeant cut ties with Philidor. Valeant's stock has fallen around 90% since that time.

What's beef?

Of course, since Pearson had kept Ackman woefully uninformed about how the company was actually making money, according to the court documents, he didn't really know what "clean" was. All he could say was that "investors fear fraud."

But on October 27, he'd had enough.

More from that email, from the court documents:

"In another email that day, Ackman wrote to Ingram, Pearson, Schiller, Morfit, and Little regarding The New York Times article by Joe Nocera on whether Valeant was the 'Next Enron?' in which the reporter wrote that 'Valeant . . . is a sleazy company.'

"Ackman said, 'When one of the most credible journalists in the world accuses you of being the next Enron, time is short.' He warned that '[y]our reputation and that of the rest of the board along with the company is at grave risk of being destroyed on a permanent basis.'

"Ackman criticized Pearson for ending the last conference call abruptly, and said: 'When Mike said that you were running out of time on the call, he was right in that the company is running out of time to save itself. When shareholders hear that management doesn't have time to address their concerns, they assume the worst. There is no amount of time that should [be] spared addressing shareholders [sic] concerns.'"

And later that day (emphasis added):

"'Valeant has become toxic. Doctors will stop prescribing your products' and 'Regulators around the world will start investigating and competing to find problems with every element of your business.'

"Ackman said, 'The only people that need scripts and limited questions are crooks. Joe Nocera is right. You look like Enron.'

"Ackman added, 'You should assume that the truth will come out eventually so there is zero downside to having it out now' and 'If mistakes have been made, admit them immediately and apologize.'

"Ackman closed the email by stating: 'You have previously made the mistake of waiting while Rome was burning. There is now a conflagration. It takes no time to prepare for a conference call to tell the truth. The time to do it is today. We are on the brink of tragedy. Please do the right thing.''"

Due diligence

Indeed, throughout the complaint it's alleged that Pearson was in the driver's seat, and that Bill Ackman was only too happy to recline in the passenger seat and take a nap as he broke the speed limit.

But that is not to say that Ackman wasn't warned. As early as January 2015, experts were telling him that something was amiss with Valeant's pricing practices.

From the complaint (emphasis added):

"Drew Katz ('Katz') wrote an email to Bill Ackman ('Ackman'), CEO of Pershing Square and a director of Valeant, complaining that 'Valeant charges approximately $300,000/yr for the average does [sic] needed for a patient with WD [Wilson's disease] (200X higher than Merck charged when it owned the drug. Merck did not raise its rates for . . . 20 years.'

"Katz noted that '[w]e hear that healthcare providers are now beginning to deny coverage due to the cost of the drug. And those without coverage are in real trouble.' Ackman forwarded the email to Pearson warning that 'Drew is a very politically connected and influential person.'"

A forwarded email is not necessarily throwing down the hammer for the good of your investors. We've asked Pershing Square if it followed up on any of Katz's statements itself and are awaiting a response.